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debentures

General Accounting Principles Accounting For Debentures

debentures

ISSUE & REDEMPTION OF DEBENTURE

Debenture

The word ‘debenture’ has been derived from a Latin word ‘debere’ which means to borrow. Debenture is a written instrument acknowledging a debt under the common seal of the company. It contains a contract for repayment of principal after a specified period or at intervals or at the option of the company and for payment of interest at a fixed rate payable usually either half-yearly or yearly on fixed dates.

According to Mr. Topham "A debenture is a document given by a company as evidence of a debt to the holder usually arising out of a loan and most commonly secured by a charge".

Section 2 (30) of the Companies Act, 2013 define inclusively debenture as "debenture" includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.

According to the above definitions the main features of a debentures are as follows.

1 A debenture is in the form of a certificate like a share certificate.

2 It is issued under the common seal of the company.

3 This certificate' is an acknowledgement of debt by the company to its holder.

4 A debenture usually provides for the repayment of a specified principal sum on a specified date. However, there is no restriction on issue of irredeemable debentures.

5 It usually provides for the payment of interest at regular intervals at fixed dates until the principal sum is completely paid back.

6 It is normally secured by a floating charge on the assets of the company.

As per SEBI, minimum 75% of the debentures shall be subscribed before allotment of debentures

DIFFERENCE BETWEEN SHARES AND DEBENTURES

Basis	Shares	Debentures
Capital v/s debt	A share represents a portion of the capital of a company	A debenture represents a portion of debt of a company.
Position in the company	A shareholder is a member of the company	A debentureholder is a creditor of the company.
Rights of ownership v/s lender	A shareholder enjoys the rights of proprietorship of a company	A debenture- , holder can enjoy the, rights of a lender only.
Right to control	A shareholder has a right of control over the working of the company by attending and voting in the general meeting which is the supreme authority of the company	debentureholder has no such right.
Dividend v/s interest	A shareholder can get dividend only when there are profits	A debentureholder is entitled to interest which tile company must pay whether or not there are profits to the company.
Fixity of payments	A shareholder gets a dividend far higher if the company earns good profits.	A debentureholder gets a fixed rate of interest per annum payable on fixed dates
Claims	A shareholder has a claim on the accumulated profits of the company and is normally rewarded with bonus shares.	A debentureholder has no claims whatsoever after he has been paid the interest amount
repayment	No such repayment is possible in case of shares.	Debentures are normally issued for a specified period after which they are repaid
Purchase own shares v/s purchase own debentures	A company cannot purchase its own shares from the market.	it can purchase its own debentures and cancel them or re-issue them.
At the time of liquidation	In liquidation, debenture holders being secured creditors normally, get priority in payment	Shareholders are the last to get payment after all other claims have been satisfied.

TYPES OF DEBENTURES-

TYPES OF DEBENTURES –

A company can issue various types of debentures which can be classified on the basis of security, permanence, convertibility and records.

1 Redeemable and Irredeemable Debentures:

Redeemable Debentures are issued for a specified period after which the company must repay the amount of debentures on a specified date or after notice or by periodical drawings.

Irredeemable Debentures, on the other hand are those debentures for which no fixed date is specified for repayment and the holders of which cannot demand payment as long as the company is functioning and does not make default in interest payment. Normally companies issue redeemable debentures.

2 Registered and Bearer Debentures:

Registered debentures are those which are registered in the name of the holder by the company in the Register of Debenture holders. Such debentures are made out in the name of the holder which appears in the debenture certificate. Such debentures are transferable in the same manner as shares by transfer deeds. Interest on such debentures is payable to the person whose name is registered with the company in the register of Debenture holders. Bearer debentures are those which are transferable by mere delivery. Interest on such debenture is payable on the basis of coupons attached with the debenture certificate.

3 Secured and Unsecured Debentures:

Secured debentures are those debentures which are secured either by the mortgage of a particular asset of the company known as Fixed Charge or by the mortgage of general assets of the company known as Floating Charge. Secured debentures are also known as Mortgaged Debenture's. Unsecured debentures, on the other hand are those debentures which are not secured by any charge or mortgage on any property of the company. Unsecured debentures are also known as 'Naked Debentures'. Only good companies of strong financial standing can issue such naked debentures.

4 Convertible and Non-convertible Debentures:

Convertible debentures are those debentures wherein the debenture holder is given an option to exchange a pat or whole of the debenture amount for equity shares in the company on the expuy of a specified period. Some companies issue convertible debentures wherein a part or whole of the debenture amount, after the specified period, is compulsorily converted into equity shares of the company.

Where only a part of the debenture amount is convertible into equity shares such debentures are known as 'Partly Convertible Debentures' but when the full amount of the debenture is convertible into equity shares such debentures are known as 'Fully Convertible Debentures'.

Non-convertible debentures, on the other hand, are those debentures for which the debenture holder does not have any right for conversion into equity shares.

5. On the basis of Coupon Rate Point

Specific Coupon Rate Debentures: These debentures are issued with a specified rate of interest, which is called the coupon rate. The specified rate may either be fixed or floating. The floating interest rate is usually tagged with the bank rate.

Zero Coupon Rate Debentures: These debentures do not carry a specific rate of interest. In order to compensate the investors, such debentures are issued at substantial discount and the difference between the nominal value and the issue price is treated as the amount of interest related to the duration of the debentures.

Issue of debentures-

The procedure for the issue of debentures is the same as that for the issue of shares. The intending investors apply for debentures on the basis of the prospectus issued by the company. The company may either ask for the entire amount to be paid on application or by means of installments on application, on allotment and on various calls. Debentures are acknowledgement of debt that can be issued either at discount , premium or at par. The journal entries for recording the same are –

If whole amount is received in one installment:

On receipt of the application money

Bank A/c Dr.

To Debenture Application & Allotment A/c

Debenture Application & Allotment A/c Dr.

To Debentures A/c

If debenture amount is received in two installments:

(i) On receipt of application money

Bank A/c Dr.

To Debenture Application A/c

(ii) For adjustment of applications money on allotment

Debenture Application A/c Dr.

To Debentures A/c

(iii)For allotment money due

Debenture Allotment A/c Dr.

To Debentures A/c

(iv) On receipt of allotment money

Bank A/c Dr.

To Debenture Allotment A/c

If debenture money is received in more than two installments Additional entries:

On making the first call

Debenture First Call A/c Dr.

To Debentures A/c

On the receipt of the first call

Bank A/c Dr.

To Debenture First Call A/c

Note: Similar entries may be made for the second call and final call. However, normally the whole amount is collected on application or in two installments, i.e., on application and allotment

Sai Lmited issued 10,000, 12% debentures of Rs. 100 each payable Rs. 30 on application and remaining amount on allotment. The public applied for 9,000 debentures which were fully allotted, and all the relevant allotment money was duly received. Give journal entries in the books of SAI Ltd., and exhibit the relevant information in the balance sheet.

Date

Particular

Bank A/c Dr.

To 12% Debenture Application A/c (Application money on 9,000 debentures received)

12% Debenture Application A/c Dr. To 12% Debentures A/c (Application money transferred to debentures Account on allotment)

12% Debenture Allotment A/c Dr. To 12% Debentures A/c

(Amount due on 9,000 debentures on allotment @ Rs. 70 per debenture)

Bank A/c Dr

To 12% Debenture Allotment A/c (Amount received on allotment)

2,70,000

6,30,000

2,70,000

6,30,000

Balance Sheet as on 31^ST March, 20XX

Particular

Note no.

Amount

Equity and Liabilities Non-current liabilities Long-term borrowings

Assets Current assets Cash and cash equivalents

9,00,000

Notes to Accounts

Particulars Amount (Rs.)

Long-term borrowings 9,000, 12% Debentures of Rs. 100 each 9,00,000
Cash and cash equivalents Cash at bank 9,00,000

Issue of Debentures at a Discount

When a debenture is issued at a price below its nominal value, it is said to be issued at a discount. For example, the issue of Rs. 100 debentures at Rs. 98, Rs. 2 being the amount of discount. The discount on issue of debentures can be written off either by debiting it to or out of Securities Premium Reserve, if any, during the life time of debentures.

Discount on issue of debentures to be written off within 12 months of the balance sheet date or the period of operating cycle is shown under ‘Other Current Assets’ and the part which is to be written off after 12 months of balance sheet is shown under ‘Other Non-Current Assets’.

The Companies Act, 2013 does not impose any restrictions upon the issue of debentures at a discount.

A company issued 2,000 6% debentures of Rs. 100 each at a discount of Rs. S per debenture, payable Rs. 50 on application and Rs.45 on allotment (including discount).

The journal entries passed will be as follows: Rs.

Date

Particular

Bank A/c Dr.

To Debenture Application A/c

(Application money received on 2,000 debentures at Rs. 5 per deb.)

Debenture Application A/c Dr.

To Debentures Alc

(2,000 debentures allotted as per Board's Resolution no ...... dated .......... )

Allotment A/c Dr.

Discount on Issue of Deb. A/c Dr.

To Debentures A/c

Bank A/c Dr

To Debenture Allotment A/c

1,00,000

90,000

10,000

90,000

1,00,000

90,000

Sometimes, the whole amount is collected in one installment. In that case, the entries may be passed through a combined Application and Allotment account; or simply one journal entry may be passed as follows

If issued at par

Bank A/c Dr

To Debentures

If issued at premium

Bank A/c Dr.

To Debentures A/c

To Premium on Issue of Debentures A/c

(...... debentures of Rs ...... issued at a premium of Rs ...... per debenture)

If issued at discount

Bank A/c Dr.

Discount on Issue of Debentures A/c Dr.

To Debentures A/c

Points to remember-

1. Nature of Debenture Allotment- Personal Account

Debentures are related to external equities. They are the creditors of the company. So the installment to be paid for the debenture is a personal account.

2. Nature of discount on issue is - Fictitious asset

Discount on issue of debentures to be written off within 12 months of the balance sheet date or the period of operating cycle is shown under ‘Other Current Assets’ and the part which is to be written off after 12 months of balance sheet is shown under ‘Other Non-Current Assets’.

The Companies Act, 2013 does not impose any restrictions upon the issue of debentures at a discount.

Issue of Debentures as a Collateral Security

A collateral security may be defined as a subsidiary or secondary or additional security besides the primary security when a company obtains a loan or overdraft from a bank or any other financial Institution. It may pledge or mortgage some assets as a secured loan against the said loan. But the lending institutions may insist on additional assets as collateral security so that the amount of loan can be realized in full with the help of collateral security in case the amount from the sale of principal security falls short of the loan money. In such situation, the company may issue its own debentures to the lenders in addition to some other assets already pledged. Such an issue of debentures is known as ‘Debentures issued as Collateral Security’.

If the company fails to repay the loan along with interest, the lender is free to receive his money from the sale of primary security and if the realizable value of the primary security falls short to cover the entire amount, the lender has the right to invoke the benefit of collateral security whereby debentures may either be presented for redemption or sold in the open market. Debentures issued as collateral security can be dealt within two ways in the books of the company:

A Company had issued 4,000 14% Debentures of Rs. 100 each to the public for cash at par. It had also deposited with the State Bank of India 5,000 14% Debentures of Rs. 100 each as a collateral security against a loan of Rs. 5,00,090 advanced by the bank. Show how would you record the above in the books of the company.

Solution

First Method:

Under this method no journal entry will be made for the debentures issued as a collateral security. But the fact will be exhibited in the Balance Sheet of the company as a foot note under the Bank Loan as under:

Secured Loans:

4,000 14% Debentures of Rs. 100 each 4,00,000

Loan from State Bank of India 5,00,000

(Secured by the issue of 5,000 15% Debenture of Rs. 100 each issued as a collateral security)

X Company

Balance Sheet

Particular

Note no.

Amount

I. Equity and Liabilities

1. Non-current Liabilities

Long-term borrowings

5,00,000

Notes to Accounts –

Particular

Amount

Long-term borrowings Bank Loan

(Secured by issue of 4,000, 14% debentures of Rs. 100 each as Collateral Security)

4,00,000

Second Method:

Under this method, a journal entry for the issue of debentures as collateral security will be made as follows:

Debenture Suspense A/c Dr. 5,00,000

To 14% Debentures 5,00,000

(Issue of 5,000 14% Debentures of Rs. 100 each as a collateral security against a loan of Rs. 5 lakh by the State Bank of India)

X Company

Balance Sheet

Particular

Note no.

Amount

I. Equity and Liabilities

1. Non-current Liabilities

Long-term borrowings

5,00,000

Notes to Accounts –

Particular

Amount

Long-term borrowings

Bank Loan

(Secured by issue of 4,000, 14% debentures of Rs. 100 ) 4,00,000

Less : Debenture Suspense 4,00,000

5,00,000

Terms of Issue of Debentures

When a company issues debentures, it usually mentions the terms on which they will be redeemed on their maturity. Redemption of debentures means discharge of liability on account of debentures by repayment made to the debenture holders. Debentures can be redeemed either at par or at a premium. Depending upon the terms and conditions of issue and redemption of debentures, the following six situations are commonly found in practice.

Issued at par and redeemable at par
Issued at discount and redeemable at par
Issued at a premium and redeemable at par
Issued at par and redeemable at a premium
Issued at a discount and redeemable at a premium
Issued at a premium and redeemable at a premium

Entries for issue of Debentures-

Issued at par, redeemable at par

Bank Alc Dr.

To Debentures Alc

Issued at a premium, redeemable at par

Bank A/c Dr.

To Debentures Alc

To Premium on Issue of Debentures A/c

Issued at a discount, redeemable at par

Bank Alc Dr.

Discount on Issue of Deb. A/c Dr.

To Debentures Alc

Issued at par, redeemable at a premium

Bank Alc Dr .

Loss on Issue of debentures Alc Dr.

To Debentures A/c

To Premium on Redemption of Deb. Alc

Issued at a discount, redeemable at premium

Bank A/c Dr.

Loss on Jssue of Deberitures Alc Dr.

To Debenture A/c

To Premium on Redemption of Deb. Alc

Issued at a premium and redeemable at premium

Bank A/c Dr.

Loss on Issue of Debentures A/c Dr. (with premium on redemption)

To Debentures A/c (with nominal value of debenture)

To Securities Premium Reserve A/c (with premium on issue)

To Premium on Redemption of (with premium on redemption) Debentures A/c

Note: Loss on Issue of Debentures in the last entry includes the amount of discount on issue of the debentures as well as premium on redemption.

When debentures are issued at a premium, its amount has been debited to 'Loss on Issue of Debentures Account' and credited to 'premium on Redemption of Debentures Account'. This provides for the additional liability for premium payable on , redemption which Will actually be a loss to the company Discount or Loss on issue of debentures is a capital loss and is written-off in the year when debentures are issued. Discount or loss can be written-off from securities premium reserve [section 52(2)].

In case, capital profit do not exist or are inadequate, the amount should be written off against revenue profits of the year.

The 'Premium on Redemption is shown on the liabilities side of the Balance Sheet till the debentures are redeemed and the Loss on Issue of Debentures on its assets side under the head 'Miscellaneous Expenses and Losses not written off' until the whole amount is written off.

Give Journal entries for the following:

1. Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at par and redeemable at par.

2. Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at premium of 5% but redeemable at par.

3. Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at discount of 5% repayable at par.

4. Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at par but repayable at a premium of 5%.

5. Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at discount of 5% but redeemable at premium of 5%.

6. Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at premium of 5% and redeemable at premium of 5%.

Points to remember-

When the debentures are issued as a collateral Security then the debentures issued will be debited to Debenture suspense

Debenture Suspense account is an adjustment account which is prepared at the time of issue of debentures as collateral security created to record Debentures on the credit side and when the loan is repaid, a reverse entry is passed to cancel the debentures issued.

A secured debenture is a Charge on asset

Secured debentures refer to those debentures where a charge is created on the assets of the company for the purpose of payment in case of default. The charge may be fixed or floating. A fixed charge is created on a specific asset whereas a floating charge is on the general assets of the company. The fixed charge is created against those assets which are held by a company for use in operations not meant for sale whereas floating charge involves all assets excluding those assigned to the secured creditors.

The right of debenture holders includes –

Right to receive interest
Right to receive the amount at the time of redemption

Debentures are issued for a specified period after which the company must repay the amount of debentures on a specified date or after notice or by periodical drawings along with interest on redemption.

The treatment of loss on issue of debentures in the company accounts are to written off in the year of issue

Discount or Loss on issue of debentures is a capital loss and is written-off in the year when debentures are issued. Discount or loss can be written-off from securities premium reserve [section 52(2)].

In case, capital profit do not exist or are inadequate, the amount should be written off against revenue profits of the year.

Interest on debentures to be booked as Revenue expenditure

Interest on debenture is a revenue expenditure booked as a finance cost in the Statement of profit & loss account while in case debenture as collateral security – no interest is paid.

Abc ltd issued 4,000 10%debentures of Rs. 100 each at a discount of 10%. The interest on debentures is Rs. 40,000

Discount, premium on redemption , security premium reserve are all calculated on face value of debenture.

Writing off Loss on Issue of Debentures

The loss on issue of debentures (both discount on issue and premium on redemption) is a fictitious asset shown on the asset side on the Balance Sheet. This must be written off as soon as possible, against the capital profits or by debiting the Profit & Loss Account. The Journal entry for writing off' the loss is as follows.

Capital Reserve/Profit and Loss A/c Dr.

To Loss on Issue of Debentures Alc

The amount to be written off depends on how the debentures are redeemed. The debentures can be redeemed either after a fixed period or in installments.

When the debentures are redeemed after a fixed period.

In this case the total amount of loss is calculated and written off evenly over the years. If, for example, the loss on issue of debenture is Rs. 5,000 and the debentures are to be redeemed after 5 years then the amount to be written off every year will be Rs. 1,000 (5,000/5)

When the debentures are redeemed in installments:

In this case the amount to be written off each year should be in proportion to the amount of debentures outstanding in the beginning of the year. Suppose a company issues 2,000 debentures of Rs. 100 each at a discount of 5% and the debentures are to be repaid by equal installments of Rs. 40,000 at the end of year.

In this case the amount of discount Rs. 12,000 (6/100*2,00,000) will be written off as follows:

REDEMPTION OF DEBENTURES

The money raised through the issue of debentures is a loan to the company and must be repaid on the specified date and in the specified manner. Normally the time and mode of repayment is indicated in the prospectus at the time of issue of debentures by the company. The repayment of the amount of debentures is called redemption of debentures.

There are a number of ways by which the debentures can be redeemed. These are as follows:

The following factors should be taken into consideration by the company at the time of redemption of debentures :

Time of redemption of debentures :-

Generally, debentures are redeemed on due date but a company may redeem its debentures before maturity date, if its articles provides for such.

Sources of Redemption of debentures :-

A company may source its redemption of debentures either out of capital or out of profits. As per the Act, all India financial institutions registered by Reserve

As per the Act, all India financial institutions registered by Reserve Bank of India, banking companies, NFBCs registered with Reserve bank of India, Housing Finance companies registered to the National Housing bank and the companies listed on stock exchange and unlisted companies are exempted from creating Debenture Redemption Reserve and may redeem debentures out of capital. Whereas for "other unlisted companies", the adequacy of Debenture Redemption Reserve shall be ten percent of the value of the outstanding debentures.

However companies are required to invest or deposit a sum on or before April 30 which shall not be less than 15% of the amount of debentures maturing during the year ending on March 31 of the next year in anyone or more methods of investments or deposits given below:

Deposit with any scheduled bank, free from any charge or line;
Securities of the Central Government or of any State Government;
Securities mentioned in sub clauses (a) to (d) and (ee) of section 20 of the Indian Trusts Act, 1982;
Bonds issued by any other company which is notified under sub clause (f) of section 20 of the Indian Trusts Act, 1982;
The amount invested or deposited as above shall not be used for any purpose other than for redemption of debentures maturing during the year referred above;

In case the debentures are redeemed in lump sum a company will invest 15% of the value of debentures. However, if the debentures are to be redeemed in installment, over a period, investment shall not be realised but carried forward to meet the requirement of debenture Redemption Investment for the next redemption. It must be at least 15% of the value of the debentures to be redeemed in the next year. However, if debenture redemption investment is more or less than 15% of the value of debentures to be redeemed, Debenture Redemption Investment shall be realised to the extent they are excess and further amount shall be invested to meet the shortfall in the investment

Redemption on Maturity

The debentures are issued for a specified period of time. After the expiry of that period, the amount of debenture is to be paid back. The debentures may be redeemed at par or at a premium. The entries are as follows:

When redeemed at par

Debentures A/c Dr.

To Bank A/c

When redeemed at a premium

Debentures A/c Dr.

Premium on Redemption of Deb. A/c. Dr.

To Bank A/c

Sinking Fund Method

Sinking fund method is another method by which the debenture can be redeemed on maturity. Under this method n fixed amount worked out with the help of sinking fund table is taken from Profit & Loss Appropriation Account and a sinking fund is created. This amount is then invested in certain government securities. The 'amount that is set aside earns a certain amount of interest, which is reinvested together with fixed amount in the subsequent years. In the last year, the interest and the appropriated amount are not invested. On the other hand, all investments are sold and the amount so obtained is used for redeeming the debentures. The balance in Sinking Fund Investment Account represents the profit or less which will be transferred to Sinking Fund Account. Then after, the Sinking Fund Account is transferred to General Reserve.

In case a part of debentures are redeemed then the amount equivalent to the nominal value of debentures redeemed will be transferred to General Reserve. The sinking fund created to redeem debentures should be termed as 'Debenture Redemption Fund' (DRF) and accordingly the sinking fund investment as 'Debenture Redemption Fund Investment' (DRFI).

Insurance Policy

Some companies create a sinking fund for the redemption of debentures but investment is not made in securities earning fixed rate of interest but instead an insurance policy is taken for the amount required for redemption of debentures paying premium to the Insurance Company. It is on the same lines as Sinking Fund with the only exception that no interest is received under Insurance Policy Method.

Redemption in Installments

As far the debenture holders whose money is to be returned, they can be selected either

by drawing lots, or
by serial number of the debentures.

The debentures, in such a situation, can either be redeemed out of profits or out of capital.

i) If redeemed out of profit

When amount is taken out of profits

Profit & Loss Appropriation A/c Dr.

To Debenture Redemption Reserve Ajc

When the debentures are redeemed

Debentures A/c Dr.

To Bank Ajc

If redeemed out of capital

Debentures A/c Dr

To Bank A/c

Redemption by Purchase from the Market

The Company can also redeem its debentures by purchase in the open market. It can be done only if the Article of Association of the company so permits. By purchasing its debentures in the open market, the company is able to redeem its debentures as well as use its surplus funds. The company usually purchases its own debentures from the market when they are available at a price which is less than its par value. In such a situation, the company saves

the difference between the par value and the market price of the debenture,
premium promised at the time of redemption, if any, and
the annual interest from the date of purchase to the date of actual redemption.

When the company purchases its own debentures in the open market, it may have to pay a higher or a lower price than the face value of its debentures. The difference between the face value of debentures and the price at which they are purchased, will be the profit or loss on their cancellation. Hence, when own debentures are purchased for cancellation, the entry should also account for such profit or loss.

Thus, the journal entry will be as follows.

In case of profit

Debentures A/c , Dr. (Nominal Value)

To Bank A/c (Price Paid)

To Profit on Redemption of Debenture A/c " (Profit)

In case of loss Debentures A/c Dr. (Nominal Value)

Loss on Redemption of Debentures A/c Dr. (Loss)

To Bank A/c (Price Paid)

The profit or loss on redemption of debentures is of capital nature. Hence, if there is profit, the same should be transferred to capital reserve and if there is loss, it should be written off against capital reserve or any capital profit.

Payment of Interest on Debentures:

When the company purchases its own debentures in the open market and cancels them, it reduces the debenture interest payable. It is because the interest in that case is payable only on the outstanding debentures. Hence, while making the entries for payment of interest, we should ensure that Debenture Interest Account is debited only in respect of the outstanding debentures and not the total debentures.

Redemption by Conversion

Debentures can also be redeemed by converting them into new debentures or shares. If it is decided to redeem the existing debentures by conversion into new debentures, the company has to follow the prescribed procedure for the purpose and give the necessary option to the debenture holders who will take their own decision. It cannot be made compulsory unless the terms of the issue had provided for such conversion. In case of debentures for which the option for such conversion has been exercised, the entry will be as follows.

Debentures (old) A/c Dr.

To Debentures (new) Alc

As for redemption by conversion into shares, it can be done only in case of convertible debentures. Non-convertible debentures cannot be converted into shares as per the latest rules prescribed by the Controller of Capital Issues.

'The conversion into shares may be optional or compulsory depending upon the terms at which convertible debentures had been issued. It may also involve premium on shares which was indicated at the time of issue or as approved by the Controller of Capital Issues at the time of conversion. The entries for conversion of debentures into equity shares are as follows:

When shares are issued at par

Debentures A/c dr

To Equity share Capital Alc

When Shares are issued at a Premium

Debentures A/c Dr.

To Equity Sharc Capital A/c

To Share Premium A/c

Debenture can be redeemed out of Capital, Profits, By conversion & All of the above

A company may source its redemption of debentures either out of capital or out of profits.

After redemption of debenture, the sinking fund account is closed by transfer to General reserve

All investments are sold and the amount so obtained is used for redeeming the debentures. The balance in Sinking Fund Investment Account represents the profit or less which will be transferred to Sinking Fund Account. Then after, the Sinking Fund Account is transferred to General Reserve.

Debentures that are redeemed out of profits require creation of Debenture redemption reserve

When debentures are redeemed out of profits then an amount equivalent to the same is created as Debenture redemption reserve.

When the Debenture Redemption investment is sold then its profit on sale is transferred to Debenture redemption reserve

The investments are disposed off before making the payment to the debenture holders. The profit made from the same is transferred to debenture redemption reserve

Debenture redemption investment is to be created at & when 15% of redemption value by 30th April in the year of redemption

Companies are required to invest or deposit a sum on or before April 30 which shall not be less than 15% of the amount of debentures maturing during the year ending on March 31 of the next year

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Master Accounting For Debentures

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